People don’t speak about it too often, but it’s kind of an open secret that millions of Americans are in tax debt. Many of them even face collection actions against them such as having their wages garnished or their bank accounts first frozen and then emptied by the IRS.

It is one of those few uncomfortable issues few people like to speak about, so I thought it would be great to give it a shot.

How the IRS works with tax debtors

If you file your tax returns but do not make your tax payments on time, usually there is no problem. The law, after all, allows you to pay late and IRS imposes some penalties for that. Problems begin when you just overlook paying your taxes thinking that there will be no consequences. Reality proves you wrong really fast.

Although the Internal Revenue Service might appear to be off base and distracted, it is not. We are speaking about the only office that was able to stop Al Capone by detecting his tax evasion in the 1930s, so take for granted they are a serious thing. What the IRS does is it waits for a reasonable period of time. If you don’t comply with paying your taxes, then they turn on the engine of their famous collection machine.

First, they will send you a couple of reminder letters.

If you still fail to pay your taxes or at least respond to them, then the next steps are not so friendly. The IRS is widely known (and often cursed) for freezing bank accounts and taking your savings away to satisfy your tax debt. This procedure is called a bank levy, and all they need is a resolution authorising it to execute it.

If you didn’t have enough money in your bank to satisfy entire tax debt, then the next step is really shameful: IRS will order your boss to withhold a percentage of your wage and send it to them instead because you have a tax debt. This is called a wage garnishment, and it is the last step the IRS will take to collect your tax money before trying to move to more serious steps like ceasing your car or a house.

Your options?

Of course, you do not need to wait until getting that far in your situation to have your property ceased. US taxpayers with tax debt have 4 options to get rid of their tax debt, or at least settle with the IRS as a way to get out of debt.

1. The first one is establishing an Instalment Agreement with them, so to say a payment plan. This means that you will pay your tax debt in monthly payments, but interest and penalties will continue to accrue until you pay off your debt in full. To learn more about this method, it might be worth visiting https://www.taxrise.com/fresh-start-program/, for example. This method is known as the Fresh Start Program, introduced by the Federal Government to help those with tax debt.

2. The next one is filing for bankruptcy. I personally advise against using this one because it has some negative consequences for you, but, under some circumstances, it can really help you reduce or even fully get rid of your tax debt.

3. The third one is trying to obtain Currently Non-Collectable (CNC) status whereby IRS places a hold on your account and waits… up to 10 years. Collection activities stop while you have this status. If you don’t expect your financial situation to change in the next 10 years, it’s a good option. But once you start making more money, the CNC status is lifted and you’ll get back all your tax debt plus huge interest and penalties which over time can double or even triple your debt. Anyway, it is still an option you can consider. Beware though, you must be in extreme financial hardship to obtain it.

4. The last one, and my personal favorite, is the Offer in Compromise (OIC). In short, what you do is you are settling your entire tax debt for a portion of it. In many cases, taxpayers can settle for 20-30% of the debt amount. Why would the IRS do this, you ask? Because in exchange, they make you sign a paper that you will file and then pay your taxes on time for at least the next five years. And if you don’t, they will cancel the settlement and bring back your entire debt again with interest and penalties. The option is not available for everyone though and is subject to many financial requirements, you must be in some sort of monetary hardship to get your OIC accepted – this article goes into more detail about OIC. The best part about the Offer in Compromise program is that you can settle your tax debt for a fraction of what you owed originally.

My advice

If you are in a tax situation that is uncomfortable for you, my advice is to check if you are eligible for an Offer in Compromise as your first line of defense. How? You can easily use this tool to pre-screen yourself in a matter of minutes. If you are eligible, then go look for your IRS representative (or come to me, if you don’t mind a bit of shameless self-promotion in this article) who will file your OIC application and negotiate with the IRS to achieve the best possible result in your circumstances.

Should that fail, go for an instalment agreement, as it is the safest option for you. Leave bankruptcy and non-collectable status for extreme situations, and use them only if your tax professional advises you to go that way.

About the author

Irina Bobrova is an Enrolled Agent with a federal license to represent taxpayers before the IRS in all 50 states and District of Columbia. As a Chief Operating Officer of PitBullTax Software she spent years researching IRS regulations on collection issues and advising tax professionals nationwide on how to prepare successful cases. Irina has plenty of experience in the IRS representation field and successfully solved numerous tax problems (including levies and garnishments) for her clients. You can learn more about her services on IBAtax.com.